BRF SA (BRFS) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to BRF S.A. Fourth Quarter 2017 Earnings Conference Call.

This call is being broadcast via Internet at www.brf-br.com/ir, where the corresponding slides will be downloaded.

(Operator Instructions) Forward-looking statements about the company's business, perspectives, projections, results and growth potential are assumptions based on the management's expectations regarding the future of the company.

Assumptions are highly dependent on market changes, on the country and industry's economic conditions and on international markets.

Therefore, they are subject to change.

As a reminder, this conference is being recorded.

This conference will be presented by Mr. Abilio Diniz, Chairman of the Board of Directors of BRF; Mr. Jose Drummond, Global CEO; and Mr. Lorival Luz, CFO and IR officer.

Now we hand the call over to Mr. Abilio Diniz.

You may begin, sir.

Good morning, everyone.

Thank you for joining us at this conference call.

Thank you for listening to us and for giving us the opportunity and chance to talk to you.

I consider this moment to be very important to the company.

As a chairman of the board, I consider this to be very important to me, and this will be reflected in my following message.

Yesterday, we had a meeting in our Board of Directors, we talked a lot, and I took the message home and thought a lot about it.

And at the end of the day, I decided to do what I usually do.

I said, Abilio, open up, speak from the heart, look upwards, ask for some light and move forward.

And that's my intention.

That's what I intend to do with you right now.

I know you don't like so much this thing about having opening remarks.

But sometimes there are models in which you have numbers, projections and then you work on your evaluations.

But it's also important for you to have some patience and bear with me because I believe my message is important.

I know that for 4 consecutive quarters, you've been surprised by the numbers projected and the results that are lower than expected.

This is clear to us.

But I'd like you to know that we have also been taken aback.

And this is something that I started doing since last year when we created the steering committee.

The management is always eager to go for more.

We want to have clear numbers, transparent information so that we can all provide information that are really realistic, with a lot of clarity in our projections.

As we speak, in addition to sharing numbers, figures and plans for the future, we have to recover our credibility.

People have to trust the company, confidence in management, in myself and everything we'll be delivering.

So that's a critical moment, and I want to recover this credibility starting today.

Since mid-2016, I've been having more a protagonist than a chairman should be or usually is.

And there are some reasons behind it.

I don't regret at all.

I think it was important.

It is the best I could have done to the company being actively engaged.

In second half of 2016, the company clearly showed that it was facing challenges and more challenges would come: high grain prices, international prices and commodity problems and also in-house problems, our problems with our management.

In early 2017, I created a steering committee at a board level, and we were more directly engaged with the management at that time with Pedro and the managers who were at the company at that time.

And I guess, the steering committee brought 2 important things.

First, we include the quality of our numbers, having more agile information.

Agility is the name of the game today.

We have more concrete information at that time, not as we should, but we started working on it, and now we have a centralized company again.

The company was decentralized.

What is right or wrong?

Should it be centralized, decentralized?

There is no right, no wrong.

The company had been too decentralized for a while.

So we had regions far from the control center.

And in this company, we'll have to keep our eyes open and integrate a long chain.

So once again, the company is centralized.

I think it was absolutely key to the business, which was started during early last year.

So we were surprised and taken aback with an episode that I never imagined I would have in my life, something that was really shocking, Operation Weak Flesh.

You have no idea what it was about.

You don't know what the impact was to this company and to other companies, too.

We had very serious problems, problems in the market, closing the doors to us.

7 million broilers are slaughtered per day, not per year, but per day.

Imagine, when you break the chain, when you break such a long chain, there is things interrupted, think about the impact in ports, harbors, distribution centers, our raw materials, our products, our inventories.

We had some imbalance since late 2016.

It's true.

It has to be admitted.

But Weak Flesh still requires some actions, and we have been actively working on it as you see in our numbers today.

But that was a terrible episode.

The markets closed the doors and then started to renegotiate prices.

And now conditions are more favorable to buyers, and things are more challenging to us, debtors.

But we are overcoming step-by-step, but we still have plans that have not been fully believed.

So this episode was really shocking, a huge impact.

And most of the earnings last year were not only related to Weak Flesh, but mostly related to it.

So March and in April, we had election of the new board, and one of the things that I clearly stated in the new board was, this company has to be more focused on brands and on people.

The big mistake in the previous administration was in terms of people management.

So I want a guy who is an expert on people, on brands and our board members interested and very competent.

So I'd like to tell you that we had an excellent choice.

And that's where I met Drummond.

I just knew him by name.

I had never met him.

So I interviewed him.

We had meetings.

And Drummond said this word the first moment we sat down to talk, and it was a word that changed the game and that's how I started admiring him.

He mentioned the word humility and then we were talking very candidly.

And we also have Marcos to be the head of the marketing committee, Flávia Almeida, my partner at Peninsula, to talk with human resources adequately.

The most important thing at a company is people, have people at a right place and then let them organize their own processes.

And we also have excellent board members like Fransisco, Walter and they greatly contribute to improve our numbers, information, the audit committee.

I guess, today, we have a concrete block at the board focused on the best to the company.

But in the middle of the year, we clearly realized that something else had to be done.

We had to do an extra mile, go the extra mile, have a new management, a new man in charge, a new CEO.

I talked to Pedro.

We negotiated with the board, and we decided to do it in a very organized manner.

August 31, we announced that Pedro would leave us in December and then we started searching for a new CEO in a very organized manner, led by the personnel committee at the board.

Drummond was elected and chosen.

He was chosen on November 22.

And then he -- after the appointment, he took office and he is here with us to talk to you for the first time.

I consider this to be a success.

We were very well organized and the outcome is here today.

And what I really believe is that, well, it all boils down to people.

Everything starts with people.

And today, about BRF team, not only Drummond, but you from the market used to criticize, well, you don't have experienced people in the industry.

But today, we have a human resource guy, who has 20 years of experience at a global company and working in several parts of the world, experience from different countries, different people, totally different cultures.

Lorival, sitting next to me.

I think you all know Lorival well.

He was already here at the front, interacting with you.

He is a very seasoned guy.

In addition, we also Alexandre Almeida, who joined us.

He was already heading consumption companies very successfully in the past.

And together with these new people, we have a team that is really amazing, outstanding.

So I am in charge of international operations; Patrício for 20 years in the Middle East, knowing a lot the market; vice presidents.

So we are very confident of having the right people in the right place.

I have Elcio in front of me.

We also have me and Attilio, so many people.

So we have a team that was already here with a lot of experience, and also Fabricio.

So we have a very consistent team, really, really consistent.

And now with Drummond, we can take this company forward.

So I'm really emphasizing this.

But I think this is important right now.

I'm confident to let you know that the company today is organized.

It is a sound, solid company.

So we have some groundwork for the future.

What about our future performance?

Only future will tell us.

Well, we have to deliver.

So based on everything I've seen so far, I think we are on the right track for the future.

And what will happen?

Well, only the future will tell us.

But I want to assure you of is that today we have a foundation.

We have a solid base today because I firmly believe everything starts with people.

These people are working on processes, searching for fixing problems and weaknesses.

They're actively engaged to deliver efficient figures, reliable figures, no surprises down the road, not having to wait for adverse events.

So we want to have this clarity and also convey this clarity to you.

So this is BRF.

This is a new company.

So just to close, I would like to give you a message.

I believe myself, I have been through very tough times and wonderful times as well, amazing moments, really great moments and also disastrous moments.

Like the media said, I've been through good and bad times.

In hard times, luckily, I managed to overcome difficulties and got even stronger than when I first started.

And this is also for the future.

The company has everything to overcome these problems stronger and stronger.

We have credibility problems now, but I'm confident the company has all conditions to get out of this much stronger than in the past, no doubt about it.

As to myself, for the last 18 months, well I'm not going to be -- to play a leading role because that's not what a chairman should do.

The chairman has to work on governance, be a connection point between shareholders and management, get the board organized and also be the connection link between the board and management.

However, he has to help strategy, make good decisions with the board and exercise its support.

So now I'll be working more, I'll be wearing a chairman hat because I really trust people who are leading the company, Drummond.

And I think this is a great moment.

We got there.

It was tough, but we got there and let's move forward now.

Last point, a couple words on Brazil.

And this is in the interest of this company.

I tend to say that I love crisis because I grow a lot.

Companies perform much better when the economy is thriving.

Nobody can deny we are about to have an economic upturn in Brazil.

No doubt about it.

The only doubt, well, economists are projecting whether we're going to grow 2.5%, 3% or 4%.

But there is no doubt growth will come.

Unemployment is not going to go down as dramatically as we wanted, but it's already going down.

Inflation rate is under control.

So consumer purchasing power will be great.

And Brazil will perform better, and we'll drive our country.

We have economic growth and we also have more political stability.

Yet we're backwards, which the past has brought us.

So this is the time we have economic growth, and we have also reasonable political stability.

So elections this year.

Well, my expectation is that Brazilians will vote better.

We'll be calmer and not only to be too excited.

We're going to be confident about their candidate.

And I believe we're going to better choose our governors and BRF is going to benefit domestically and also abroad.

I think it's a good moment.

It is great.

Drummond, you are our boss.

So now you have the board, all the support you need, everybody is supporting, everybody is standing by you.

And I'm certain that with this team, you have plenty of condition to take this company successfully into the future.

I know you want to talk about figures, but I have to say this.

It's important for you to know where we have come from, where we are now, so you can better project our future, not only based on figures, but what more you trust.

Thank you.

Thank you very much for your kind words, Abilio.

Thank you for your supporting message reflecting our board.

We had a meeting yesterday and all this trust in our team.

So I thank you very much and I'm really thankful to you.

Me and Lorival will take this process forward, always assuring the best and most transparent representation of our company.

So I thank you all for your participation on this call, which is my first earnings call for BRF.

As you have already read and seen in our financial statements, 2017 was a difficult year.

It was below our expectations.

It was a year where adjustments to the direction of the company were and are still needed.

And before we start looking ahead, looking to the future, I would like to comment that in the short time that I am a head at BRF, I was able to go deeper into some critical topics, and the initial study, which is not over yet, has shown concrete and pragmatic actions as far as revenue, cost and capital funds are needed and will be communicated and executed over time.

I will come back after Lorival's presentation.

He is going to tell you more about our results of 2017, and I'll bring you more details about (inaudible) agenda and how I see the future, how our team sees the future and the expectation that we have in these topics I just mentioned.

And I also would like to share with you what I believe to be my agenda and my overview to the company, which is not exhaustive.

We will have a chance to talk also in the future in our BRF Day.

But we'll -- I'll go back after Lorival's presentation about our details.

Lorival?

Good morning, everyone.

Thank you very much for your participation.

I will tell you more about some details on our financial statements and I will also make clear some important topics and relevant topics as well.

So you can see that we are including also for our conference call material that you can follow in our website.

So now I am at the first page, Page 5, where I will tell you more about the introduction and the use -- the concept that we are using now, which is the adjusted EBITDA.

As you know, the adjusted EBITDA is in agreement with CVM instructions (inaudible) 2012.

And starting on the fourth quarter of 2017, we are adding that information so you will still have as you have seen before, not only in this material, but also in our management report.

You will have the reported EBITDA, and we are now adding this topic.

The objective here is to provide more details on some effects that will affect our activities and that aim, a better understanding of our operating performance and the way we are following up our results within the company.

So we are sharing with you the same way as we are analyzing and looking at these results in the company.

So I do have a few considerations here that I would like to make them clear.

So I wanted to stress them.

So there is no republishing of past financial statements or balance sheet.

That has never even discussed and considered.

So this does not exist and never existed, and we never talked about it.

Also, important to say is that the company at the end of 2016 within that cycle of changes in the auditing companies, we had Ernst & Young up to the end of 2016.

That cycle ended.

We closed the process and KPMG started the auditing process in January of '17, so first, second, third and fourth quarters.

So now it's always KPMG.

This is always very clear.

There has not been during this process over the year any discussion, any consideration about changing auditing companies or anything that has been said in the market.

I would like to stress, I'm repeating myself about that, there is no republishing of financial statements and no changes in auditing companies.

So we are really adding that information to you.

So just to make it even more clear, and you have seen that in the management report.

You can see in the presentation on the screen.

We are describing all the lines that we consider to build our adjusted EBITDA.

All these figures, all these lines have been identified.

They are in the financial statements that are audited in a consistent fashion for all periods, regardless if the amounts or values are positive or negative.

Also it's important to make it clear that our external audit as well as our statutory audit committee, our fiscal counsel and our Board of Directors have reviewed this concept, and they are in agreement with that.

Now going towards the figures.

You see here the lines and the amounts that are being considered.

So we have a first line for minority shareholders stake.

There is another line with a more relevant impact, which is, as Abilio has already mentioned, that it's a direct impact from the Weak Flesh Operation that happened in 2017.

And then we had BRL 40 million in the first quarter, additionally BRL 118 million in the second quarter of '17.

And now in the fourth quarter, we had an impact of BRL 206 million.

These BRL 206 million, it's important to mention, that come from an adjustment to a realized value of inventories coming from certain finished products that we had some destination to final market.

But considering some embargoes that still existed over 2017, those inventories ended up increasing going up, and now we are doing that adjustment to the realized value, and we are using them as raw materials.

So this is an adjustment in value that has been done and that reflect the fair value of that inventory value and that has been done with all transparency possible.

We discussed it into the details with the auditing companies and with the other members here.

So this is a major impact that has happened, BRL 206 million.

We are also adjusting other lines that have more accounting effects, not necessarily related to the business or to the cash generation of the business.

And here, as an example, we had in 2016 some accounting gains coming from the process of the acquisition of a distributor in Kuwait, AKF, and we did have an accounting gain that year and we also adjusted that.

Something else that always affects the company's results are tax recoveries, including gains from successful law suits in the past and that it has significant impact.

So once again, we do have transparency here and the result.

You can see that we did have significant amount in 2016, another amount in 2017, including what we mentioned in the third quarter regarding PERT.

So this amount we also have a positive impact in the company.

But we take them away from the base.

And finally, we have an accounting effect from hedge accounting of our debts.

Because we have exports, so we do have an accounting effect on that and the settlement of those debt installments and so in the accounting we end up posting this impact.

And once again, it's transparent in a way that it is already rolled out in the company, and we are sure that we are providing you more transparency and we are sharing as well the way we are managing the company.

Now turning to the next page, going into the results themselves.

We have had a growth of 8.1% in the quarter and almost 5% in 2017 vis-à-vis 2016.

That clearly is thanks to a better commercial execution in Brazil, where we had a recovery of market share.

We have followed that in the last quarters and also, we have a positive impact of the well succeeded consolidation of Banvit that happened over the year.

Our revenue also grew in the quarter and slight drop vis-à-vis the prior year, which was -- in the full year, and we also had a growth in all the regions, obviously, with the negative impact coming from the international market, especially in Europe.

So we do have that as well coming.

Because of the Weak Flesh Operation, some of the markets were closed for a while.

So once again, we did have that impact.

And we ended the fourth quarter with a gross margin of 21%, which is an advancement of 1.4 percentage points vis-à-vis the prior year and a consistent improvement in all the regions as we have already mentioned.

Once again, we did have some embargoes, some impact and so in international market, we did suffer a few impacts.

But now it's important to say and we're looking at the numbers above the EBITDA and net results and here we have the net loss that we've had in the quarter, BRL 784 million.

It's important to comment.

First on that result, we already include -- we already have here the impact of the BRL 206 million that I explained about regarding the inventory reassessment.

Additionally, we also have an impact in this quarter of BRL 164 million coming from provisions reinforced of civil and labor issues in Brazil and in the Southern Cone, especially Argentina, that is included here.

In addition to that, we had other BRL 49 million coming from commercial adjustments in OneFoods also impacting the results of this quarter.

And BRL 34 million in adjustments and provisions for the PLR also that had an impact.

And remember, all these adjustments are noncash in nature.

In a way that summing up all of that, we will have an impact in the EBITDA of BRL 450 million in the quarter, which is extremely significant.

We understand that this is not recurring.

It's a onetime only that happened in this quarter.

So now going down to the net income, you know that provisions that impacted the EBITDA.

You always have an EBITDA of -- the adjustment that's not going into the line of the EBITDA, but rather in the financial expenses line.

So there is a counterpart here of other additional BRL 80 million, which also had a negative impact.

And you remember that in August of 2017, it had been announced the total return swap operation the company had at the time, shares in treasury and revaluation and the mark-to-market of that operation in the quarter, has generated a loss of BRL 121 million, which once again will impact on the financial line.

So we already had the BRL 80 million, now we have BRL 120 million.

And that's not part of what we call the core of the operation itself.

And then adding in the income tax line in December, the government in Argentina changed the tax rate from 35% to 25%.

And that also had a negative impact for us.

What we had there -- we have there are assets in terms of deferred taxes.

And considering the calculation that we have to do of those future credit realization, we had to post them as a negative impact as well and the results of around BRL 118 million, BRL 120 million.

And why am I going into all the details?

These are effects that happened in the quarter in terms of accounting provisions, adjustments and others.

And the total and impact of BRL 772 million in the net result of the company.

That was a negative impact.

So it's important to highlight that.

Also relevant is that the nature of these adjustments is that we had no cash disbursements here.

These are effect of provisions that had happened.

And you can see in our report that the net cash generation of the company, the free cash flow was of BRL 758 million, a robust result.

You see in the releases and in the material that you have the highlight for Brazil, OneFoods, international and also the Southern Cone.

Considering the time and because I still have to turn the floor to Drummond and open for the Q&A, I will turn to Slide 11 because I have some important topics to stress.

So as you can see, we had operating cash flow already -- discounting a CapEx of BRL 310 million in the quarter, we had a generation of BRL 700 million of operating cash.

And maybe even more important is the free cash flow, which was BRL 758 million as you probably have seen already.

And what we are reporting for our adjusted EBITDA of BRL 645 million, this is a cash that is higher than the EBITDA, and this is, of course, received and this is because of the nature of the provisions that we have because they're really noncash provisions.

Therefore, we are confident about the prospectus of the company and the cash generation, which is robust, cash generation that we had in the fourth quarter of last year.

We include here analyzing the debt profile.

We ended the year with a robust and sound cash of almost BRL 7.4 billion.

And additionally to that, we still have BRL 3.3 billion in a revolving credit line that is not being used, and we don't see right now the need of using that credit line.

But we do have that available for us.

Our net debt has ended the year at BRL 13.3 billion, with an average term of 3.5 years.

I would like to say that it's our objective to extend the profile of that debt.

We are already working towards that.

This is our objective over this year to extend it substantially.

And as I said, we are already working on it.

We are monitoring the market's conditions, both local and international.

And this is an objective of the company to have an extended debt term.

The leverage has ended the year at 4.46x, which is below our objectives and below where we want to manage this company.

We do have our objective, and it is one of our target for all of us here in the company in 2018.

This is a commitment that we have with the Board of Directors, which is by the end of this year, we'll be managing this company below 3x.

We understand that to manage this company at 2.5x and 3x is the right management for a company such as ours and we will allow us to have sustainable growth as well as a profitable one.

That is clearly described in our internal goals and our commitment is to deleverage.

And to conclude.

Now about the CapEx, you can see that we have ended 2016 with BRL 5 billion in investment and that is BRL 2.6 billion of CapEx and BRL 2.5 billion of M&As.

We have had more discipline over 2017 with BRL 2.3 billion, and we are working now in order to look for a total investment this year that is below BRL 2 billion and that with an operating performance.

And we are confident on that and the right management of our working capital.

We are confident that we will meet our targets regarding the deleveraging of the company.

Therefore, I conclude my presentation.

I just would like to highlight something else.

When you look at the cash position where we are at, I want to stress and to make it very clear, the company does not need capital increase.

We are not working to do any follow-on or capital increase, that we have not even started that type of discussion.

It has not been proposed by the CFO.

This discuss just does not exist within the company.

So the company is not working -- is not going to the market.

It does not need equity and is not working in any follow-ons right now.

I just wanted to make that clear so that you understand it.

So I end now my presentation.

I'm sorry if I extended myself a little bit.

And I'll turn the floor back to Drummond, and he will tell you more about the perspectives and his priorities in managing the company.

Thank you.

Thank you.

Thank you, Lorival.

Thank you, everyone.

Slide #3, please.

This slide depicts our agenda and the work architecture for the future.

And it also helps to explain why I joined the company.

It is something very common between the company's values over 80 years of history and my beliefs.

These are my personal beliefs that I've been using in my carrier over 35 years.

So based on this design, we have many points in common in terms of beliefs.

But I'd like to get started on this slide, starting from the end.

Lorival talked a lot about cash generation.

I'd like to say that you hear us always talking about gross margin, cash generation, net income.

Why am I telling you this?

Lorival talked about CapEx.

You have access to our figures.

So if I may, I would like to address a topic, which includes both revenue stream, cost stream, capital stream.

Our depreciation since 2014 increased BRL 700 million because we heavily invested in growth, growth that has not come as we expected.

That's why I firmly believe the company has full capacity to grow by at least 7% per year, both locally and globally, benefiting from previous investment, materializing this investment, which doesn't mean we won't have growth and investments in the future, we'll certainly have, and sometimes often to debottleneck some things.

But we have the ability to grow, not only grow in volumes in Brazil and worldwide, but also to deliver our good performance in many regions in Brazil, where we had a big drop.

So we have to recover our market share.

Our (inaudible) happened mid-last year or mid-2016, actually.

And today, we already have the best share position in 6 quarters, and we have to continue our recovery process.

In our viewpoint, when it comes to that value, we recovered at least 5% market share in total in Brazil.

I believe this is doable.

And the team's efforts in Brazil are being very well led, working on the foundations of market performance in distribution, sales force, footprint to the point of sale, lineup, packaging, all fronts, including prices, so we can have an adequate strategy to recover market share and manage our gross margin.

So when it comes to revenues, we believe we have plenty of conditions to grow continuously at least at 7%, including a significant share recovery in Brazil and working on our brand strategy globally.

So this market share recovery, I underscore, it is important if the market mix is weak or strong because that's the company strategy.

We lost a lot of ground and now we have to recover.

We have plenty of conditions to do that, we are working on it and making plans to raise the company for adequate share numbers to our company.

As to cost dimension and the cost stream, I have a lot of expectations.

I hope we can have a coordinated, multi-annual effort to reduce at least BRL 300 million per cost of the company's operations as a whole, including initiatives for total spending management and acquisition, loss of ways, operating efficiency, automation, simplification of processes.

If we put all these fronts all together, I'm certain it will be greatly contributing with efforts coordinated and led by a very engaged action by our vice presidents, supervisors, at least a BRL 300 million per year of cost reduction.

So this also has to do with the capital stream, our capital dimension.

Like I said, we'll keep on investing in the company.

What we need to do today is to have a better use of previous investments.

So we should be able, in future years, to invest less than the run rate we had in previous years, therefore, releasing capital for several other functions at the company, including reduction of our leverage and indebtedness.

And the same goes for working capital.

We believe the combination of these fronts, CapEx, working capital, will have us -- will give us an opportunity both to dispose some nonoperating assets and therefore, set for something around BRL 500 million per year of capital released.

So when we work on these 3 fronts, cost reduction, which we believe is doable in all fronts, with a broad program at the company of BRL 300 million or more year-on-year, capital release around BRL 500 million with more proper CapEx management, not only with better use of our growth and investment in the past, but also being more efficient in terms of CapEx management, reducing working capital and some operating assets, totally BRL 500 million of capital released.

So this, driven by growth and leverage in the future, we believe these are -- this is critical (inaudible) for the company.

Under my direction, under our management and our daily, monthly care and attention on these work fronts, we're fully convinced that we can go for these targets and goals.

You know we don't give guidance.

This is not a guidance for result in earnings.

But now when we have very tough times, the running rate is okay.

However, in the fourth quarter, we had very poor net income in 2017.

So it's important to show what we're doing in order to make sure that 2018 and beyond, we'll have a recovery in gross margin, cash generation starting 2018 and always underscoring net income generation.

So why is it so important?

I don't have anything against EBITDA.

However, when we make this remark, like I did about our depreciation and then we measured EBITDA, this is not shown.

Today, we have another BRL 700 million in our capacity to generate net income precisely due to increase in our depreciation, which has not been materialized or visibly yet in our ability to grow as we should.

As to grow, there is an extra dimension.

This company, out of its nature, it's long chain.

It needs to grow ongoing basis.

The company should have not changed strategy quarter-on-quarter, correcting paths and tracks every quarter.

It takes a long-term strategy.

And then I ask your attention for this mid-column about our fundamentals.

There are 4 important take-home messages.

We don't have 2 strategies.

We don't have a short-term and a long-term strategy.

Performance in the short term is to work daily on our long-term strategy, which is growing on and on, proper share management, positioning, with responsible cost of capital.

We need information integration in our integration.

And we'll talk about this.

We have dedicated CapEx for following years and a lot of economies will come.

A quantum leap is required, so we can have better information management of the company.

Expansion and presence of our brands domestically and globally.

This company has 3 big parts: agribusiness, industry and distribution.

In agribusiness and distribution, we want to keep on building the equity of our brands.

That's something imperative at the company.

However, it is also linked to our ability to generate result that gives us the right to remain in the investment process.

So we will never sacrifice our future just for the sake of a more beautiful quarter.

We'll constantly be working to be sure we'll be working on a long-term strategy.

We'll always be keeping an eye on our commitment to deliver our annual and quarterly promises, but always keeping an eye on the long-term strategy.

Like I said, short-term is only a fraction of long term.

And most importantly, of all these foundations, my first job and any leader's first job is to develop people better than himself or herself.

Because that's how we can make sure the company's -- the company longevity.

Alexandre, Lorival, myself, we are a clear example because we came from the outside.

This company needs to work to develop, promote and give opportunities for in-house talents, particularly in leading positions.

We have to work to have a succession pipeline to ensure the company's longevity, and that's my personal commitment with the board and also shared with you.

So now these imperatives for sustainable operation.

These are things that I've always believed throughout my career and has a lot to do with my trajectory, the company's history.

The company always was in charge and considered this to be a priority.

So I'm very comfortable in being at this company, where I can speak very comfortably about the importance of these imperatives.

They are alive and kicking.

And all these topics on the screen, we address this every Monday in our staff meeting: the cost reduction, capital release, growth program.

These are topics that will always be present in our management, in our daily agenda, weekly, and I'll always be personally involved.

So this does not conclude our conversation.

We know we have BRF Day.

But today, we didn't only talk about our earnings for 2017, but we'd like to convey the message of how we envisage opportunities for the future, the major screens about cost, capital and share review.

I'm very confident.

I know challenges are big, but opportunities are much greater and always very welcome.

And I feel very much supported by board members, the management.

And I feel responsible for this, responsible for leading the company along this path, leading, protecting and helping shareholders, partners, everybody of the company.

So now we would like to open the floor to questions to talk and hear from you very openly with transparency.

Once again, our conversation does not end today.

We have a lot of opportunities to interact in the future.

But please bear this in mind, we will be working on our fundamentals in order to improve company's performance in its structure, with keeping an eye on performance in all the items on the slide.

Thank you very much.

(Operator Instructions) The first question is from Isabella Simonato, Bank of America Merrill Lynch.

Drummond, my question is about Brazil strategy.

How do you see this market share recovery that we intend to see continuously in the future?

And what about the mix?

And what about the improved gross margin?

I understand you have a cost reduction program.

But what about the mix between Brazil and prices contribute to such margin recovery down the road?

Or is this more related to volume rather than a better mix or a price increase for consumers?

That's my first question.

The second question, out of the BRL 300 million of cut down on costs, could you give us more color about the sources and origination of these cost cuts?

And what are the most critical points?

Thank you, Isabella.

Answering the question about Brazil.

I think it's important to clarify that we tend to have an antagonistic approach.

It is either price or share.

I don't believe such.

Market share involves several fundamentals, like I said in the beginning of my talk.

And Brazilian's performance is very good.

If you check our performance early last year, we had a mismatch in terms of the price move.

We were too decoupled a lot of share that continue with sequential share loss from 2016, and we're extremely decoupled.

And then we had several other actions, hiring salespeople, recovering the number of customers of the company.

It was already 200,000, went down to 163,000.

But now we'll recover to 190,000, and we'll come back to 200,000 by the second half of the year.

So these fundamentals are critical to recover both market share and price.

Alexandre team's work has shown very good balance, managing all these fronts.

Now our strategy to recover share.

If the market mix is bad, we're going to grow share.

If the mix is good, we'll grow market share.

We just have to make sure our cost is competitive to make sure share recovery is not going to impair our margin.

We all know that there is no roles and activities that involve a single dimension.

We can not only focus on share, price or cost alone, it takes a mix.

And this execution, well, in some quarters, the composition of the parts would be more favorable; in other quarters, composition would be less favorable.

We're not going to change the strategy just for the sake of it.

We're going to fix whatever has to be fixed.

But I feel very comfortable with the path in Brazil.

The first sign since I joined the company, watching closely the performance last year, early this year, I have even a better feeling.

But we had a trade-down in the company -- in the country, I mean.

The company can not only move away from part of the market because there was a trade-down, and we don't want to change our price positioning.

We always have to be in line with the signs of the market, recovering our market share and protecting and building an image design that is favorable.

What was your next question, please?

BRL 300 million -- cut down on costs.

Obviously, I cannot disclose it.

I cannot give you a lot of detail.

But I can tell you the different fronts, at least one of the fronts.

I can give you more color on this front.

We have a very important procurement operation, excluding rain, which is in operation, which we believe is very well managed, very adequate management, and the same goes for our procurement.

But the bottom of sales is really big and I guess, we can be even more efficient in our source, dual-sourcing strategy, electronic auction and therefore, we can have unique performance with costs compared to our previous management.

That's one front.

As for information integration, it may also have an impact on our capacity to improve the administration productivity of our corporate roles and also operations.

We have 70,000 to 80,000 people in our plants.

And certainly, we can benefit from a better information integration in our performance and finally, automation as well.

Automation is an interesting topic because if we only focus on our 3-year horizon, nothing is going to be automated.

But if you think about the next 30 years, there is a lot to be automated.

So that's the mindset for the future.

I hope I've given you some color and maybe we can talk later in different circumstances.

Our next question is from Gabriel Lima, Bradesco.

I have 2 questions, Drummond, and both of them are related to human resources, which is a critical area for BRF.

The first question is regarding PLR.

Last year, you had a loss, and you don't have to pay PLR this year.

But last year, you chose not to pay it.

And then you had problems with your people at the plant.

So I just would like to understand what you were going to do about that.

You have 100,000 employees.

And also, I would like to understand about people you just started a month and a half ago, but BRF had a lot of important people there in the past.

So how do you see HR, not only profit sharing, but also human resources?

And I have a question after that.

Thank you very much.

Well, first, we have already decided, and we have communicated that yesterday.

We have approved it in the board.

Our employees would not have the right to the PLR by the rules, and we decided to have an extraordinary bonus to them acknowledging their efforts.

And I believe there is an equation that we have to follow, which involves efforts, results, acknowledgment, recognition and a reward.

This year, we decided to reward the efforts.

We did not have the results.

And I think this is fair because it is right to compare the alignment of the expectations of a VP and an officer with the shareholders, but it is too far to have that expectation alignment and the influence and a shop floor employee to compare that to shareholders that expect net income.

So that's why we decided it.

I think it was a right decision.

The board has approved it, and it has been communicated to the company last night after we received the information.

About the second part of your question, I don't comment on my team, and I will not tell you anything about that.

But I will give you an overview about talent.

Talent is never enough.

You always lack talent.

I have never had a situation in my career where I had 3 talented people for one position.

Rather, it was always the other way around, and we want always to bring more talent to the company so that we can go through the difficult moment at an easier pace.

I believe that all these changes that we had over the time were not good because you end up losing continuity, you lose history, you feed the competition.

But today, we have a leadership in human resources area that is extremely experienced.

I myself also have great experience in that area as well.

And now our VPs are all motivated to walk that path, which is to develop people better than ourselves.

That's part of our strategy.

And I'm sure that we are going to see that over time.

And adding, as I said, our VPs and our officers are not eligible to bonuses this year, and this has been approved by the board yesterday as well, and it has been communicated to the company.

And you said that you had another question?

Yes, Drummond.

It's interesting to hear your decisions.

My other question was a little bit more difficult to you.

But I think we need to understand a few things.

And it is -- everybody knows that you are in this position for a little bit over a month and you have Walter and Francisco representing Pedro and (inaudible) that have not supported your nomination at the end of last year.

And for us that we are not in the company every day, that seems to be a lack of alignment within the board.

It may be a disagreement between the board and the management.

I know we are not in your day-to-day activities in the company.

But I would like to hear from you what -- because that's what we receive on the other side.

And I would like to understand if you have had freedom to manage the company and even taking -- considering the initial comments from Abilio, that should not be a protagonist anymore from now on.

Well, let me address this question with a disclaimer.

I cannot comment on the votes of the board members.

Because the votes anywhere, that is very -- the votes are very personal.

But what I can tell you and I can assure you that these are 2 excellent colleagues.

They contribute to the company since they started in the board with them in the past.

They are very constructive.

And our discussions are always aiming the best for the company.

Since my election, I have received the support from them and from all the other members.

I have nothing else to say.

And let me tell you, if I fail, this is my responsibility because I have received great support from the board members, from all the officers.

I would humbly recommend you -- and I don't spend 1 minute of my time thinking about that, and I would recommend that you shouldn't spend your time doing that either.

Our next question is from Thiago Duarte, BTG Pactual.

I have 2 questions.

The first is to better understand the figures about the future.

And you also -- you mentioned in the release and your presentation as well.

Especially, Lorival, when you talk about the leverage from 2.5x to 3x, can you elaborate a little bit more on that?

How you're going to get to these figures?

Do you believe this is possible up to the end of this year just with operating cash generation and the natural growth of the EBITDA year-on-year?

Or do you believe that there is room to have divestments or other companies?

Or you have noncore assets from the past years you already mentioned them?

So I would like to hear how you are coming to this 2.5x, 3x EBITDA.

And my second question and now is more a question for Drummond.

And going back to the first question related to the nondichotomy volume, price, but fact is that, Drummond, the average price in Brazil, when we analyze processed foods, is still very weak when we analyze the recent past.

And as you well said, if the market is trading down, all would have to follow it.

But after that fourth quarter, do you already believe that in 2018, we will see a reversion, a change in the promotional environment?

Or do you believe the consumer will be still cautious and that the market has a weaker mix than what you would like to see?

I want to understand how you see that progress at the end.

Thank you for your question.

This is Lorival.

I'll turn to Drummond for the second question shortly.

About the deleveraging, as you mentioned, you have all the components in which we believe that we're going to work on to come to the figure of lower than 3x.

So as you know, we have that normalized base.

And at the end of the fourth quarter, not considering those adjustments, we had BRL 900 million EBITDA, with a margin of 10%.

So I think this is a significant and relevant figure that really makes us feel confident about the perspectives for 2018.

So this is part of the deleveraging process, and it also includes an expansion of the EBITDA for 2018.

In addition to that, it's not only the EBITDA, we -- you have also to generate cash.

So yes, we do have a commitment, a strong discipline in terms of the capital use, whether in investments and then both CapEx or any other acquisition.

So we will have over 2018 a disciplined and severity very great in terms of capital expenditures and that is going to be below of what we've had the last years.

And that also, with management in that line of working capital in the 3 main fronts, which will give us a cash component in a way that we can see and we have seen by the net cash generation in this last quarter higher than BRL 700 million.

We feel confident about the cash generation for 2018.

So we do have a component, which is the cash generation that's going to be used to pay the debt, also investments and a better EBITDA.

About divestments, as we mentioned, that's not in our plans.

We don't see the need to do any type of divestments or any type of sales of operations or businesses.

That's not being discussed.

This is what we're going to look at with a lot of discipline.

And we will look at the nonoperating aspects or assets that are not strategic.

So we can always be analyzing them and in order to make the better use of the capital.

That is our objective to have the better return on the capital, if we have an opportunity for some real estate to sell and other items and, as Drummond has mentioned, we're already working along those lines.

So this is the third component which also will give us a more base for the deleveraging.

So basically, we have these 3 fronts that make us feel confident that we are going to be below the 3x of leverage.

Now Drummond is going to answer the second question.

You probably have seen in the analysis and we also have carried out this internal analysis that our grain costs, they went up and then they came back down.

But we did have a problem with other costs that have compromised the performance of our gross margin.

That's why we had that important initiative of having a program for cost reduction in the company, which is not done in a week or 1 month.

This is a recurring reduction.

And we believe that we have the potential to contribute to that magnitude that I have mentioned before.

And especially because we want to have the foundation for a growth strategy and share recovery without compromising the value and that's exactly what we imagine to execute and what we're doing in Brazil, and we'll continue executing that in Brazil.

So that balance is -- and that's something that we will have to run on a daily basis and on a monthly basis if we have a sales mix that is at least in line with and not worse than the markets, and that allows us to compete with our cost structure.

And it's clear that we had an up and a down side to our direct costs, and we lost intrinsic margin in the company, which we need to recover.

And we do expect -- we do have an expectation about our gross margin for the company as a whole in 2017, and we expect it to recover several points in the margin over this coming years.

The next question is from Alex Robarts, Citigroup.

In fact, what I really want to understand better, I'd like to understand more your vision about OneFoods.

My question is twofold.

In Q4, we've seen a drop on margins, and you've explained the drivers to us.

But I'd like to better understand the BRL 49 million in the result.

So maybe that has to do with the commercial area.

So what was the driver?

And do you think it might happen again this year?

The second part of my question has to do with your outlook and forecast for the margin this year to OneFoods.

Could we assume that the margin could go back to a double-digit level like we saw over 2016?

And in this case, what would the drivers be?

Do you think the macro scenario could be of help or be a challenge?

What about inventory levels?

Do you think they'll get back to normal?

And perhaps what about the current atmosphere in Saudi Arabia after the tax increase?

Do you think the scenario is more normal now when it comes to local competition?

Let's do the following.

I'll answer the end of the question and Lorival is going to answer the first part of the question.

Without getting into details on the operation since I joined the company and now as we speak, as we all know in 2014 and 2015, we had amazing years in OneFoods, a very important combination of events.

And then things were normal and then we had a very complicated in 2017 with surplus inventory, so to speak contaminated stocks with higher costs and a drop in demand in these markets, therefore, very significant price pressure.

And we closed the year with best price positions of the previous quarters.

And OneFoods and ourselves had very different conditions to perform in 2018, which is part of our in-house plans and our confidence as well.

As we perform over the year, we believe we have a chance to share good results with you.

I believe we are redesigning our baseline, so we can grow for -- to increase our performance in the future.

Lorival is going to talk now about the adjustments you asked.

Now answering your question and giving you more color about the adjustments.

So what happened?

In reality, we have commercial agreements, trade agreements that we have over the year and then we had to settle some accounts by year-end -- at the end of the year, I mean.

So this will no longer apply for next year.

So what happened was something very specific, nonrecurrent.

These were agreements from year 2017, and at the end of the year, we had to make some adjustments.

So everything was very smooth.

We were very confident, and that's why we say these are nonrecurring items, and they will not apply to 2018.

It was just something very specific, nonrecurring.

Can you confirm that, as we speak, in the Middle East, inventory levels are normal?

Or do we still see some kind of -- or we still need more time until we get to a more normal level?

It is pretty normal and plenty of conditions to have the performance planned for the year.

Just to clarify, inventory levels are all normal and no commercial adjustments will be repeated.

So in 2018, we have a very favorable scenario.

The next question is from Antonio Costa Barreto, Itaú BBA.

I'd like to address other international markets, starting with Argentina and Europe.

In Argentina, we know it's a smaller market, but when you check results, they are behind our expectations.

We understand there is the grain issue, inflation, costs, label.

But if you think about other consumer goods companies like food and beverage, they are performing better in Argentina.

Why is it so difficult to transfer?

Margins are low in Argentina.

What about the mood for 2018?

That's my first question.

Lorival speaking.

I'll be brief and then I'll turn it over to Drummond.

It's important to clarify when it comes to Argentina that there are some events that occurred over the second half of the year.

This is clearly shown in Q3.

And they have an impact on our earnings.

Over 2017 and in the last quarter, we did see an increase in volumes and expansion in share gain, some products and brands -- our leading brands in the segment.

So we did post growth in volume and growth in prices.

On the other hand, you're right, there was a significant impact on cost.

However once again, this impact was nonrecurrent.

We had union and labor issues in Argentina, and we revisited some topics in terms of labor contingencies.

So we had some adjustments in the last quarter, and it had a very strong impact on our EBITDA.

And at the same time, we also had discussions involving one of our plants, the unions and increase in personnel expenses.

So as we speak, we're focusing on these negotiations.

So that's something timely about a good performance -- a good commercial performance, something nonrecurring.

May I just add, just to add to answer the question, we are working in-house, and we'll be working in the following months, revisiting our strategy for Argentina.

I believe this will somehow allow us to put this plan into practice.

Maybe in a couple of months, we have a chance to talk again about this.

Great.

Now my second question about international market, about Europe.

We understand difficulties with zero license plants, but based on what we know, what about the exclusion of plants?

It was something mandatory by the Ministry of Agriculture and the Brazilian industry.

How do you see the outlook or the perspective to reopen your plant?

And do you think that once it opens again -- I'm trying to check the impact, a positive impact in the future.

Prices also increased a lot in Europe as far as I understand.

So there is some benefit in having several Brazilian plants not exporting to Europe right now.

So what about this equation in your mind?

We can reopen more plants, but other Brazilian competitors can do the same and then you have more low volume, on the other hand lower prices.

What about this equation in the future?

Our (inaudible) plant, by the way, was already authorized to export to Europe.

It also has other plants, about to be reconfirmed.

So we are confidence that we're going to get to a favorable position, not necessarily opening our plant.

Well, it doesn't mean that other players' plants will open too, because that's a plant-by-plant decision.

But even if other players' plants also reopen, we are confident in our ability to compete in the European market, both in terms of quality and also costs.

So you're obsoletely right, we've been through a lot of pressure, difficulties, shutting down our units, but our international team, our operations team led by Fabricio also managed to have outstanding performance, not only late last year, but also early this year, and we trust we have a positive outlook.

Just as a reminder, Drummond, how many plants do you have today which are not licensed or opened to Europe.

You mentioned (inaudible).

And is there any other that we should bear in mind?

Only (inaudible).

The next question is from Botir Sharipov, HSBC.

I have a couple as well.

First on EBITDA margin in Q4.

Obviously, you guys adjusted for some of the items, but there were more than BRL 700 million of nonrecurring items, I think, you mentioned in the press release.

Have you calculated what the adjusted EBITDA margin would have been had those items been adjusted for?

I think you may have mentioned 10%, and you also mentioned that you're looking to improve margins in 2018.

Would 10% be the baselevel from which you're looking to improve the margin this year?

And then my second question is on, again, also, exports outlook.

I know you talked about OneFoods and that you're looking for favorable conditions in 2018.

But Banvit seemed to have a challenging quarter in Q4.

So if you could maybe comment on Banvit performance in Q4, what you're expecting in 2018 as well as what you expect out of Asian market this year.

First, I'm going to address the EBITDA margin and then Drummond is going to tell you more about market -- expectations about the market.

Naturally, I understand why you're asking this question and, I guess, you also understand my answer.

I cannot give you the figure expected for 2018, but what I can tell and the exercise that we did and that you reflected very well in your question, qualifying the EBITDA margin at 10%.

So what we tried to do was exactly to position and show where the company is and where we are.

So we closed Q4 at a level of 10%.

And this gives us a lot of confidence.

We mentioned several times different circumstances, for instance, OneFoods, with a more proper inventory level.

The commercial performance in Brazil is also more adequate, with significant market share recovery and also an increase in the base of point of sales and active customers and clients.

So 10%.

Drummond talked about cost initiatives.

So I believe we start 2018 in a very positive -- on a very positive tone, clean and ready to benefit, not only from the market growth, but also from any possible opportunities in a very robust manner.

So this is the outlook.

Well, Drummond is going to elaborate now about export outlook.

I believe our OneFood's performance, like we said before, when we answered another question, it was very challenged over the year, but we are confident that our performance will be in line with our plans, expectations.

These are very good expectations and they are above our performance achieved last year, much higher and greater.

So once again, we cannot give any details on precise expectations.

But we're fully convinced that as soon as we start reporting the earnings for 2018, everything will be materialized in a very effective manner.

And maybe on Asian markets.

Obviously, there are high inventories there and prices too have come down.

I don't know if you could comment on what your expectations in general will be for the demand in Japan and South Korea.

Do you expect to see improvement there in 2018?

Thank you very much.

This Q&A is over.

Thank you for your questions.

So we'll keep on having a very visible, transparent conversation.

We do everything we can in order to be as transparent as possible about the company's performance.

And I hope to meet in person in our BRF Day.

Thank you very much.

Our expectations, our motivation goes for unique performance as a company over 2018 and beyond.

We are very confident and assured of opportunities in the future.

Thank you very much.

This concludes BRF S.A. conference call.

Thank you very much for joining us.

Have a good day.